Square expands to the UK

US-based mobile point-of-sale (mPOS) provider Square is expanding into the UK, its fifth market following Australia, Canada, Japan, and the US, according to CNBC.

The company is hoping its card reader, which starts at $39, and its accompanying business software will be met with strong market demand in the UK, which has a large number of small businesses that still lack the ability to accept cards.

Square could find fertile ground in the UK, but will need to ward off competitive mPOS firms.

Many UK small business customers could snatch up card readers The majority of Square's customer base (61%) is made up of merchants processing less than $125,000 in annual sales. The UK has those small merchants in spades — a UK government study showed that 99% of sellers in the region were small- or medium-sized businesses. Furthermore, many of the small businesses lack existing card readers, and could have need for Square's product — Finextra cited Barclaycard estimates that half of UK small businesses cannot yet accept card payments.

Square will compete with other firms targeting UK small businesses. In addition to competing against established European competitors like iZettle and SumUp, Square will be also be up against other US-based competition like First Data and PayPal. Square gained an early lead in mPOS due to its innovative card reader, but today many competitors offer similar hardware at comparable price points. To stand out, Square's hardware does carry one significant advantage — it processes payments quickly. The company recently shared that it cut the time to process chip transactions down from 4.2 to 3.6 seconds.

Looking beyond hardware will be the key to compete in the UK and worldwide. In contrast to hardware, which is a loss leader, subscription and services-based revenue, which includes software, is a growing contributor to Square's bottom line. Total software and services revenue in Q4 2016 grew to $41 million, up 81%. Square is reportedly looking to further grow its software skills further by looking into machine learning startups that could give the company deeper insight on the risk profile of merchants to offer then more products, according to Square CEO Jack Dorsey.

In the US, when customers make payments via banks, they're completed in two ways: via wire transfer, or through the Automated Clearing House (ACH). ACH transactions, which are less expensive for customers and which accounted for 18% of total noncash US payments volume in 2012, can take up to five days to settle because of the way that they are processed.

That's problematic, because it interferes with consumer demand for convenience and could slow the supply chain or make it more challenging for banks and businesses to get paid in the way they need to conduct operations. As a result, the US Fed looked into the ACH system in 2013, and found that there was no "ubiquitous, convenient, and cost-effective way for US consumers and businesses to make fast payments between banks.

In response, the Fed, NACHA, and private institutions have begun to find ways, together and separately, to modernize the US payments system in order to increase convenience and catch up to many of the country's trade partners. The Fed has formed a task force, which will resolve potential solutions, while NACHA and private institutions are pushing banks to hit a set of three same-day settlement deadlines through late 2016 and into 2017. Such a system will particularly benefit high-growth spaces in the electronic payments ecosystem, like P2P and B2B payments, which could magnify its impact over time.

Though it's likely the system could grow ACH volume by making it a more appealing option in these high-growth areas, it could become a hindrance to banks. That's because the implementation is costly and time-consuming — the Fed find that the business impact is net-neutral to negative for these firms. Instead, the parties that reap these benefits are providers of services in these high growth areas, like mobile bill pay firms or P2P vendors, which means that banks are actually aiding their competitors. That means that Faster Payments could ultimately enhance the impact of digital disruption in the payments ecosystem, rather than mitigate it.

Jaime Toplin, research associate for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on faster payments that looks at why the US needs a Faster Payments system, explains how the country plans to implement it, evaluates the different areas that are most likely to be impacted by Faster Payments, and determines which parties benefit from such a system and which are hindered by it.

Here are some key takeaways from the report:

Sluggish settlement of payments in the US is pushing NACHA, the national electronic payments trade group, and the Federal Reserve to reform the system. US payments made via ACH can take three to five days to settle.The Fed's Faster Payments Task Force and NACHA are looking to implement a same-day settlement program in the US by 2017 in order to increase consumer convenience.

The number of transactions affected by faster payments will increase over time.Four key areas — P2P, B2B, C2B, and B2C payments — will gain the most from such a system. And these areas, which comprised 12% of US payments volume in 2014, will grow rapidly over time, therefore magnifying the impact of such a system.

Faster payments implementation will be a mixed bag for banks, because of additional costs associated with the burden of implementation. And the platform is likely to actually boost third-party providers, like P2P app vendors or mobile bill pay firms, by giving them an easy way to increase efficiency, engagement, and volume, without a substantial rise in transaction costs.

In full, the report:

Explains how the US payments system works and why it needs to be modernized

Defines Faster Payments and lays out how the country plans to implement such a system

Explores different high-growth areas in the payments ecosystem and the impact Faster Payments could have on them

Evaluates whether or not such a system will be useful for banks and financial institutions

Determines the beneficiaries of Faster Payments and the impact it may have

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